Saying the “N” Word in 2009 (Hint: “Nationalization”)

By Martin Brown

wallstreetIt wasn’t very long ago that saying the N-Word would not have drawn gasps, not to mention causing the stock market to shed a quick 250 points in a single trading day.

But in the midst of the worst economic downturn in eighty years, the N-Word is quietly being spoken from the halls of Congress to the world’s top financial marketplaces.

Of course in this case the N-Word is “nationalization,” and it’s out of the closet and on the table as economists, politicians, financiers, bureaucrats, businesspeople, and ordinary Americans try to figure out just what impact nationalizing banks would have on our economy and our society.

Let’s take a step back and reason out how we came to this point. First, most people confuse “bankers” with the “banking system.” For example, when people here about officials at major banks behaving badly, most notably Citibank and Bank of America come to mind, they think of the $700 billion approved in October of 2008 under the Bush administration. This program known as the TARP, for Troubled Asset Relief Program, was put into place to assure the continued operation of the banking system as we neared the presidential election. Under then Treasury Secretary Henry Paulson, half the amount approved by Congress, $350 billion, was released to ailing banks. The other half of that money is now under the control of the Obama administration and the new Treasury Secretary, Timothy Geithner.

Unfortunately for a Bush administration focused on transitioning out of power, much of the behavior of bankers steeped in greed went unnoticed and unchecked. This led to the handing out of generous mult-million dollar bonuses after government assistance had been put in place. Understandably, this caused a sense of citizen outrage and was viewed as welfare for the very wealthy. Therefore, in recent weeks when Secretary Geithner and President Obama have mentioned the need for further infusions of cash into these troubled banks, the public has grown wary and short of patience.

Without these infusions of capital, however, it appears unlikely that our banking system will begin freeing up credit so that economic activity as we have known it in American can move forward. Many of us do not understand that ours is a credit-based economy. The classic example of this is seen in the farmer, who borrows money to plant and work his crop in the spring, and then pays back the debt and interest after the harvest, and in a good year, comes away with a nice profit as well.

Beyond that traditional view, credit runs so many aspects of our economy, from car loans to house loans, from construction equipment to commercial aircraft. Money is the heart of our financial system, and credit is the lungs: it breathes new life into our economy as it fuels steady growth. The American Revolution was financed on credit and we’ve been borrowing to grow and expand ever since.

With this in mind, the possible need to nationalize certain major banks becomes more understandable. Love or despise bankers, banks themselves are central to the function of our economy. The transfer of wealth from savers and investors into businesses, and homeowners is central to how our economy works. If that system were to fail you would see immense disruption in every aspect of American life. Unemployment rates would skyrocket well beyond the level of ten percent, perhaps reaching twenty percent or higher. That is why the focus of Wall Street keeps returning to the continuing operation of our major banks. They know the financial system hinges on the life and death of our banking system.

While nationalization is commonly thought of as the government stepping in and taking over the operation of a private concern, it is important to remember that there is no one definition for the term “nationalization.” In the purest sense of the word the government would take over one or more banks and run them on a day-to-day basis just as it operates the U.S. Postal Service. Banks have been nationalized in the past by the Federal Deposit Insurance Corporation, it happened as recently as last year when failed IndyMac bank was taken over by the FDIC and sold off to investors six months later. It happened in a much bigger way when in 1983 the FDIC took over Continental Illinois, than the nation’s sixth largest bank. That rescue and turnaround sale took seven years.

This process of “stress testing” our banks, which occurs in good times as well, is essential to see just how far the Feds will have to go to stabilize the operation of giant banks such as Citibank. As of this past week, the government now controls 36% of Citibank. Is it scary that we find ourselves in this situation? Undoubtedly. The N-word in itself is scary. Inaction, however, is a lot scarier than that.

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